Rethinking Capitalism in Mexico:
The case of Grundfos
Master Thesis 2021:
Copenhagen Business School Submitted 17. May, 2021 Pages: 71
Characters: 158.268
Author:
Magnus Grauballe, Msc in International Business Student Number: 110127
Supervisor:
Lars Abel, CBS
Abstract
This dissertation seeks to investigate the unique institutional context of Mexico in order to provide solutions to the great infrastructural challenge which the country faces in the water sector. The Danish pump manufacturer Grundfos serves as a case company, hence the purpose of the paper is to recommend possible strategies for the company to increase its impact on the problem. Using the Strategy Tripod theory by Michael W. Peng and the Creating Shared Value theory by Michael Porter and Mark Kramer this thesis analyses the conditions for Grundfos to expand its activities in Mexico.
The analysis’ are performed on three independent levels being the institutional level, the industry level and the firm level. A fourth analytical element applying the Creating Shared Value perspective discuss and suggest a strategy for Grundfos based on the conditions identified in the prior analysis’.
The findings of the analysis specifies how redefining the approach to capitalism and value creation can open up new avenues of innovation and drive productivity. The results indicate three different approaches for a company to create societal and environmental benefits while staying productive and competitive.
Abbreviations
AMLO – Andrés Manuel Lopez Obradór CFE - Comisión Federal de Electricidad CONAGUA – Comisión Nacional del Agua CSR – Corporate Social Responsibility CSV – Creating Shared Value
DC – Dynamic Capabilities DI – Dansk Industri
EKF - Eksportkreditforeningen
EZLN - Ejército Zapatista de Liberación Nacional FDI – Forein Direct Investment
GDP – Gross Domestic Product
IMF – International Monetary Foundation MORENA - Movimiento Regeneración Nacional NAFTA – North American Free Trade Agreement
OECD - Organisation for Economic Co-operation and Development PAN - Partido Acción Nacional
PISA - Programme for International Student Assessment PRD - Partido de la Revolución Democrática
PRI - Partido Revolucionario Institucional SDGS – Sustainable Development Goals SME – Small/medium Sized Enterprise
USCMA – United States Mexico Canada Agreement
Figures and tables
Figure 1: The PIE model (Mygind, 2007)
Figure 2: The dynamic capabilities framework (Teece, 1997) Figure 3: Analytical Framework
Figure 4: The Research Onion (Saunders, 2009).
Figure 5: Hofsteedes Cultural Dimensions
Table of content
1.1. INTRODUCTION ... 1
1.1.1. PROBLEM AREA ... 2
1.1.2. RESEARCH QUESTION ... 4
1.2. DELIMITATIONS ... 4
1.3. LITERATURE REVIEW ... 5
1.4. THEORETICAL FRAMEWORK ... 6
1.4.1. THE INSTITUTION BASED VIEW ... 6
1.4.1.1. The Pie Model... 7
1.4.2. THE INDUSTRY BASED VIEW ... 8
1.4.2.1. Industry Rivalry ... 9
1.4.2.2. Opportunities ... 9
1.4.2.3. Threats ... 9
1.4.3. THE RESOURCE BASED VIEW ... 10
1.4.3.1. VRIO ... 10
1.4.3.2. Dynamic capabilities ... 11
1.4.4. CREATING SHARED VALUE ... 12
1.4.5. ANALYTICAL FRAMEWORK ... 12
1.5. PHILOSOPHY OF SCIENCE AND METHODOLOGY ... 15
1.5.1. RESEARCH PHILOSOPHY ... 15
1.5.2. RESEARCH APPROACH... 16
1.5.3. RESEARCH STRATEGY ... 17
1.5.4. RESEARCH CHOICES ... 17
1.5.5. TIME HORIZON ... 17
1.6. DATA COLLECTION ... 17
1.6.1. PRIMARY DATA... 18
1.6.2. SECONDARY DATA ... 19
1.6.3. VALIDITY AND RELIABILITY... 19
2. ANALYSIS PART 1: THE INSTITUTIONAL SETTINGS... 20
2.1. AN INTRODUCTION OF MEXICO ... 20
2.2. POLITICS ... 21
2.2.1. Social groups ... 21
2.2.2. Political processes ... 25
2.3. INSTITUTIONS ... 30
2.3.1. Formal institutions ... 30
2.3.2. Informal institutions ... 35
2.4. ECONOMY ... 37
2.5. SUB-CONCLUSION ... 43
3. ANALYSIS PART 2: INDUSTRY CONDITIONS ... 44
3.1. INDUSTRY RIVALRY ... 44
3.1.1. Xylem Inc. ... 45
3.1.2. KSB ... 46
3.1.3. Sulzer ... 47
3.2. OPPORTUNITIES ... 48
3.3. THREATS ... 49
3.4. SUB-CONCLUSION ... 50
4. ANALYSIS PART 3: FIRM SPECIFIC CAPABILITIES & RESOURCES ... 51
4.1. THE CASE OF GRUNDFOS ... 51
4.2. CAPABILITIES OF GRUNDFOS ... 52
4.2.1. Path dependency ... 53
4.2.2. Sensing ... 54
4.2.3. Seizing ... 55
4.2.4. Transforming ... 56
4.3. SUB-CONCLUSION ... 56
5. ANALYSIS PART 4: CREATING SHARED VALUE IN THE MEXICAN BUSINESS ENVIRONMENT ... 57
5.1. RECONCEIVING PRODUCTS AND MARKETS ... 58
5.2. REDEFINING PRODUCTIVITY IN THE VALUE CHAIN ... 61
5.3. BUILDING INDUSTRY CLUSTERS ... 63
5.4. RECOMMENDATIONS FOR GRUNDFOS ... 65
6. CONCLUSION ... 66
7. BIBLIOGRAPHY ... 69
APPENDIX 1: INTERVIEW MED SØREN BLATT BENDTSEN – DEN DANSKE AMBASSADE ... 77
APPENDIX 2: INTERVIEW MED EMIL STUB – DANSK INDUSTRI: ... 80
APPENDIX 3: INTERVIEW MED LARS SMED JENSEN – EKF ... 83
APPENDIX 4: INTERVIEW MED LUIS ALVAREZ – GRUNDFOS MEXICO ... 85
1.1. Introduction
When visiting Mexico for the first time in 2018 I experienced first-hand how the water supply was dependent on a big truck passing my house to fill up the property’s water tank. This was unusual as we in my home country Denmark have an abundance of water in the underground. I later learned that the village I was living in had no water and therefore had to transport it from the mountains further inside the country. Few years earlier there had been a river flowing through the center but now there was only an empty channel where the water had been running not so long ago. Due to the water being redirected and used for watering agricultural fields further up the river it was now completely dried out. This is a an example of the destructive effect a poor economic policy can have on the environment. Furthermore, it displays some of the challenges facing many developing economies as lots of people are dependent on a river for their water supply.
Today the lack of water is affecting more than 40 percent of the world’s population (SDGS, 2021).
This is a disturbing figure which is expected to increase with the rising temperatures caused by climate change. The World Economic Forum has identified 6 out of the top 10 risks by likelihood and impact over the next 10 years to be related to climate or water (World Economic Forum, 2020). Fast paced urbanization, population growth and climate change are some of the factors accelerating the demand for water everywhere in the world. More mouths to feed means more industry which requires more energy – all fueled by huge amounts of water. The developing countries are the ones now suffering from a lack of water and will increasingly do so as populations are growing faster in these countries. Droughts are more usual here as the countries lack the infrastructure it requires to buffer such a development. In many emerging markets it is a necessity to fill the infrastructural gaps to support increased manufacturing of consumer goods. In order to fill these gaps and secure their own water supply private enterprises around the globe has invested billions in water projects.
Essentially this emphasizes that there is no growth without access to clean water. As emerging markets are destined to fuel the economic growth which our global society so tirelessly desire it calls for a shift towards stakeholder capitalism in order to secure the water supply of production.
1.1.1. Problem area
Mexico’s economic development is impeded by its infrastructural challenges. In order for the country to prosper and grow it is in need of infrastructural development that can fuel the economic growth. Furthermore the development is necessary in terms of social needs and the improvement of the quality of life, addressing the nation’s enormous gap between rich and poor. The infrastructural requirements are spread among different sectors such as transportation, energy generation & distribution, water and communications. In order to achieve the long-term development goals and improve the overall quality of life it is essential to seek and bridge the infrastructural gap. This is something the United Nations has also acknowledged in their 17 Sustainable Development Goals by including the points of ‘Industry, innovation and infrastructure’,
‘Clean water and sanitation’, ‘Affordable and clean energy’.
An example of the need for infrastructural improvements is the limited road networks connecting the north to the underprivileged regions in the south such as the states of Chiapas, Guerrero and Oaxaca. This increases complexity in terms of time and transportation costs while it centers the industrial zones in the north of the country, hindering productivity in the south and increasing the economic inequality. This is also illustrated by the level of FDI being concentrated in the North of the country. A key example of the country’s inadequate infrastructure is the poor access to water which is hurting particularly the agricultural sector employing 12,5 % of the working population (Nordea, 2021). Something which in 2020 sparked a violent conflict in the region of Chihuahua as thousands of farmers took control over a hydroelectric facility due to extensive drought in the region. This resulted in a woman shot dead during a confrontation with the national guard (Washington post, 2020). The scarcity of water in Mexico is something which affects people in every part of the country as only 58 % of the population has access to clean water in their houses (The Trade Council, 2020). Highly populated areas such as Mexico City is under high pressure and need solutions. As a response to the problem the Mexican president AMLO has dedicated 2,6 billion USD to water & sanitation projects in mainly central and north Mexico (The Trade Council, 2020).
The extensive infrastructural investment can be seen as a large opportunity to provide Danish solutions to Mexican stakeholders as the Danish government has identified Mexico as one of fifteen
‘Climate front posts’ as a part of its new sustainability strategy (Udenrigsministeriet, 2019). This means an increased focus on diplomacy and promoting climate solutions on the Mexican market.
Additionally the foreign ministry of Denmark along with business organization ‘Dansk Industri’ has identified the energy sector as one of three sectors particularly important for Danish companies doing business with Mexico. Denmark has a strong position within the renewable energy sector and therefore the future infrastructural projects within water & sanitation presents a great opportunity.
The Danish mechanical engineering company Grundfos specializes in hydraulic pumps and is in fact the largest manufacturer of hydraulic pumps in the world. The company’s products has different applications spread across different sectors but offers various solutions in the wastewater and water-supply sector. The company has production in the north of Mexico and thus are already engaged in the market. At the heart of Grundfos’ business are the two SDG’s ‘Clean Water &
Sanitation’ and ‘Climate Action’. The company’s mission is to ensure water access for people all around the world and make a positive lasting climate impact (Grundfos, a). Its strong position on the global market for water & sanitation along with its ambitious climate vision makes it a candidate to help solve the increasing scarcity of water in Mexico.
OECD states in their newest economic survey overview of Mexico that “improvement of the institutional quality would have the largest growth benefits of any structural reforms” (OECD, 2019).
The reason why the institutional quality is specifically important in Mexico can be attributed to the high level of corruption and the level of violent crimes in the country. Not only among other OECD member countries does Mexico have an alarmingly high level of corruption but also among the Latin American countries. This is highly problematic especially when talking publicly funded infrastructural investments as it decreases the efficiency of the public spending. The political reforms then become less impactful and the trust in the government suffers from this. The business environment is likewise affected by the inefficient institutions which makes it more difficult to do business in the country due to a higher level of uncertainty. This creates unique institutional challenges which potential investors should take into account when planning their strategy on the Mexican market.
1.1.2. Research Question
Concluding from the problem area the need for infrastructural improvements in Mexico is blatantly obvious, specifically the need for clean water and sanitation as it is a basic human need. As one of the strongest Danish positions globally is renewable energy and the organizations supporting Danish exports has it as a focus point it provides a great opportunity for Grundfos to provide solutions for Mexican infrastructural projects. The unique institutional challenges should be taken into account when companies choose to do business with Mexico as the country’s institutions can be inefficient, creating a riskier business environment. From the problem area the researcher has derived at the following research question and sub questions:
“How can Grundfos increase its social, environmental and economic impact in Mexico and thus help solve the Mexican water crisis?”
“What are the institutional challenges of doing business in Mexico?”
“How is the Mexican environment for Foreign Direct Investment characterized?”
1.2. Delimitations
The project will be limited to investigating the infrastructural development in the water & sanitation sector in Mexico, the opportunities which it presents to Grundfos and the unique institutional challenges which the company faces. It must be emphasized that the institutional context in Mexico is unique and the results will not be the same as if conducted in a different emerging market with a different case. Therefore this paper does not aim to analyze the nature of infrastructural investments in emerging markets in general or the institutional challenges which companies might face in other emerging markets. The research will seek to analyze how Grundfos can create value for the Mexican society and the environment while expanding their business operations. Yet the research does not offer solutions or strategic proposals aimed at specific infrastructural projects as such will be far too complex for the limited scope of this article. The results will instead propose a more general approach to increase the company’s impact in the infrastructural development.
1.3. Literature review
An extensive literature review has been conducted prior to initiating the process of writing this thesis. The following section will present the academic articles and books that support the business perspectives that make the theoretical foundation of the paper. This section will not go in depth with neither of the theories but merely present them to provide an image of which articles and books that has inspired the development of the thesis. They will be more thoroughly explained as they are applied in the analysis’.
Within the field of emerging markets the researcher will draw on the work of various scholars.
Especially Peng (2008, 2009) and his view of how the institution based view should be a vital part of any company’s strategy when seeking to do business in an emerging market. The article
“Institutions, Institutional change and Economic performance” by North (1990) has been a vital part of mapping how the institutions are shaped and how the dynamics between the various institutions and their development influence the economic performance. Ultimately among the new institutional scholars aiding in the creation of this paper should be mentioned Scott (1995), who in his book “Institutions and organizations” presents the theory of the three pillars of institutions which are the three elements that form the institutional environment.
The element of the paper investigating Grundfos’ resources & capabilities has been inspired first and foremost by Barney (1991). His article from 1991 examines how there is a link between a company’s resources and their ability to sustain a competitive advantage. Within the resource based view especially two articles by American economist Teece (2007, 1997) have aided in the development of this paper. The articles explicate how dynamic capabilities are necessary for superior firm performance. Furthermore they have a focus on sustainable enterprise performance which suites the case of Grundfos.
Michael Porter has contributed to the base of knowledge via his book on competitive strategy (1980). The industry based view is presented in the book and is a business perspective which has shaped business thinking and academic learning. Besides his contribution to the industry analysis
Porter’s theory of Creating Shared Value which is a stakeholder theory rethinking capitalism, is a vital part of this thesis.
1.4. Theoretical framework
This section will provide a presentation of the theories and models making the theoretical foundation of this paper. General concepts within international business will be explained preceding the models that will be applied in the analytical framework. The leading perspectives within international business relevant for this research project are the Institution Based View, the Industry Based View and the Resource Based View. The three perspectives should all have a weigh in when a company plans it strategy as they are three interdependent levels of any business environment.
As argued by renowned scholar Mike Peng (2008) the institutional perspective is in international business studies often seen as “background” and overshadowed by the industry- and resourced based views when determining a company’s strategy. This is not surprising as much of the research making the foundation for the industry- and resource based views is based on competition within the United States where the institutional framework is relatively stable. However the institutional quality in Mexico is much lower and thus should be considered in terms of strategic planning.
Ultimately the sustainable business concept of Creating Shared Value will be explained as it is relevant when seeking to investigate how Grundfos can create a positive impact on the environment and the Mexican society.
1.4.1. The Institution Based View
One of the most prominent scholars within new institutionalism the economist Douglass North argues that institutions form "the rules of the game” (North, 1990). By this statement is meant that they are a vital part of any business environment. Furthermore he states that these are “the humanly devised constraints that structure human interaction” (North, 1990). Here he is broadly dividing the institutions into formal groups which represent laws, rules and regulations while the informal groups represent ethics, cultures and norms.
1.4.1.1. The Pie Model
The PIE model was developed in 2007 by professor in International Business at Copenhagen Business School, Niels Mygind. The model consists of three factors ‘Politics, Institutions and Economy’. These three factors shape the political and macroeconomic environment in a country.
The model puts emphasis on the formal and informal institutions and their role in the country’s development. The model differs from the PESTEL model by adding a dynamic element as the three factors are interrelated. Examples of the formal institutions are the economic, the political and the legal systems. The formal institutions are shaped by political processes while the informal institutions unconsciously emerges from the socialization also referred to as the culture.
The political factor consists of political processes and social groups. The social groups are defined by their “interest in relation to employment and ownership resources” (Mygind, 2007). The groups vary from each other by having different political beliefs and by being in different sectors. In terms of the economic resources these are often exploited to gain political power/influence. So the political processes and the decision making is influenced by the different social groups. Thus the two factors political process and social groups are interrelated.
The economic factor is defined by stocks and flows. The flows are represented by the level of production and the level of income while the stock is the amount of accumulated resources such as natural resources, infrastructure, technological assets and human capital. The economic policy of the country is also an element yet it has elements of both the economic institutions and politics.
Something which must be taken in mind when applying the PIE model is that the surrounding world affects every business environment. Thus factors outside of the country can determine the institutional development to an extent.
With emphasis on the dynamics between the three elements Institutions, Economy and Politics the researcher has elected this model. The aim is to provide a more holistic picture of the Mexican business environment and investigate how the dynamic interaction between the three factors shape the societal and macroeconomic development. It is contrary to the more known PESTLE model as the PESTLE simply lists the factors but fails to capture the interlinks between these. The
researcher wishes to get behind the development of the institutions in order to better understand exactly a business environment is shaped. When conducting a thorough literature review on emerging markets preceding the assembly of the analytical framework, it was found that institutions play a particularly big role in emerging markets as they are often less efficient. As the PIE model emphasizes the role of institutions it was found very fitting to investigate this topic.
Figure 1: The PIE model (Mygind, 2007)
1.4.2. The Industry Based View
The industry based view became widely known in the 1980’s largely due to Michael Porter. The theory argues that the circumstances within a given industry largely shape a company’s strategy and performance (Porter, 1980). The perspective is widely acknowledged as a leading perspective within strategic management. It analyses a company from an external perspective as the environment of the company is the center. The criticism of the Industry Based View is that it ignores the specific resources and capabilities of a company which is why it will be paired with the resource based view in order to provide a holistic picture of the subject.
1.4.2.1. Industry Rivalry
From the Porters Five Forces framework the Industry Rivalry has been selected to analyze the level of competition in the Mexican water & sanitation industry. The framework was introduced in 1979 by Michael Porter and to this day it is still utilized in company practices and in academic learning.
Examining the industry rivalry can help shed light on the profitability of the industry and who the major competitors to Grundfos are. It is important to map the competition within the industry as it is important for a company to respond to the development within its industry. Besides Grundfos should be aware of its competitors in order to differentiate their strategy.
1.4.2.2. Opportunities
Borrowing from the SWOT analysis, the element of ‘Opportunities' will serve as part of this analytical framework. The opportunities arise from the development within the industry and thus from external factors outside the company. Even though the opportunities should be seen in an industry context the institutional voids in Mexico does also present potential opportunities as billions will be invested in infrastructure. This emphasizes the interlink between the institutional development and the business opportunities in the market. As many of the potential infrastructure projects subject to the analysis are generally publicly funded the analysis will also draw on elements identified in the country’s economic policies. It should be stressed that the paper does not aim to analyze specific infrastructural projects and thus the analysis will provide a general overview of the type of opportunities that arise in the water & sanitation industry.
1.4.2.3. Threats
Another element from the SWOT analysis is the element of ‘Threats’. Similar to opportunities the threats arise from external factors such as the industry development and factors affecting the industry. It encompasses the issues in the business environment which Grundfos should be aware of an take into consideration when making strategic decisions. The element is included in the analytical framework to expose which external threats Grundfos are exposed to.
1.4.3. The Resource Based View
The resource based view was introduced by Jay Barney (1991) and is a vital contribution to the field of international business and strategic management. The perspective is centered around the internal environment of the firm. The theory argues that a firms specific resources and capabilities is what enables them to have a sustained competitive advantage and thus differentiate their performance from their competitors. The focus of managerial thinking lies on identifying which resources and capabilities that can lead to a superior performance and then seek to exploit these.
The RBV has been criticized for not being able to accurately measure a firms intangible resources and thus not capture its full potential.
1.4.3.1. VRIO
The VRIO framework developed by Barney (1991) will be applied in order to identify the unique resources of Grundfos. The researcher stresses that a distinction must be made between the term resources and the term capabilities. Resources can be divided into four different groups which are financial capital resources, physical capital resources, human capital resources and organizational capital resources. These are referring to the company’s liquidity, the products of the company, the employees and their skills and knowledge and the organizational structure of the company.
Furthermore a company consist of the assets it possesses such as the before mentioned tangible and intangible assets. Yet to utilize all these features to gain a competitive advantage the company must be capable of doing so, hence the importance of capabilities. As described by Barney capabilities are “attributes that enable a firm to coordinate and exploit its other resources” (2001).
Yet not every resource can lead to a competitive advantage which is why the resources should be valuable, rare, costly to imitate, and the company should be organized to exploit their resources and capabilities (VRIO). In order to provide strategic recommendations for Grundfos the researcher will apply the VRIO framework to identify their positions of strength. In order to grasp just how the resources are being exploited the researcher finds that a separate section analyzing the dynamic capabilities of the company is needed. Thus the following section will describe what capabilities are and how they enable a company to profit from its resources.
1.4.3.2. Dynamic capabilities
Dynamic capabilities were described by the renowned economist David Teece (1997) as organizational or strategic routines that seek to configurate the resources of the company. The ability to do so is important as business environments are often changing quickly hence a company must be able to reconfigure its competences to address this change. Also the company should be able to create new resources and modify the already existing base of resources. The term capabilities should be seen as a mix of both the company’s skills and the processes to utilize their skills. These are closely connected as the skills lose their value if the processes utilizing these skills are not optimal. Therefore a synergy between skills and processes is of the essence in order to compete in a complex business environment. The researcher will seek to identify the DC’s that define Grundfos and provide a competitive advantage. A framework developed by Teece (1997) will aid in doing so by examining the relationship between the capabilities and the organizational performance. Furthermore it should be considered that the company operates in a dynamic setting.
Figure 2: The dynamic capabilities framework (Teece, 1997)
The two factors affecting the DC’s of the company are Path dependency and the External environment. Path dependency deals with the theory that a company’s history or past behavior is to an extent shaping its future behavior. The External environment are external factors which affects the company’s DC’s. The DC’s are grouped into three types of activities:
1. “Sensing referring to how an opportunity can be identified and assessed;
2. Seizing which refers to the implementation of a sensed opportunity, the mobilizing of resources in order to address an opportunity and capture its value;
3. Transforming which refers to the process of resource configuration in which the organization is continuously renewed” (Adam & Lindahl, 2017).
These are the three methods for a company to improve their outcome.
1.4.4. Creating Shared Value
The concept of Creating Shared Value was first introduced in 2011 in an article written by Michael E. Porter professor in Business and economics at Harvard Business School and the head of institute for strategy and competitiveness at Harvard Business School, Mark R. Kramer. The theory within the field of sustainability can be perceived as a shift in managerial thinking away from the concept of CSR which is an additional feature to a company’s business strategy. The concept seeks to change the core of operations whereas the concept of CSR is often more focused on investing the company’s resources in social or environmental projects. The main distinction between the concept of CSV and CSR is that societal or environmental problems are being perceived as strategic opportunities while in CSR they are considered somewhat ethical duties. Hence the problems in a company’s external environment are seen as genuine business opportunities and will lead to strategic targets.
The CSV concept is particularly relevant in an emerging market such as Mexico as it has a higher impact here than in developed countries. This was emphasized by Khanna & Phalepu (1997) as they argue that several business opportunities arise from the lack of infrastructure and from the poverty that is found in these markets. The societal challenges presented to the companies in a market such as Mexico makes the connection between society and its corporations much more impactful.
1.4.5. Analytical framework
When examining the three leading business perspectives making the theoretical foundation for this paper it is clear that when isolated neither of them are sufficient to provide strategical suggestions
for Grundfos. The models selected for this framework are rooted in the three business perspectives but it must be stressed that only elements of the theories will be applied in the analysis as the perspectives are far too broad for the scope of this paper. The analytical framework has been assembled with the purpose of creating strategical recommendations based on the interplay between the capabilities & resources of the company, the industry based competition and the institutional settings in Mexico. As said by Mike. W Peng (Peng, 2008; Peng, 2009) it is the interplay between these three levels which shape a company’s strategy.
As the research question “How can Grundfos increase their impact in Mexico and thus help solve the Mexican water crisis?” deals with both an economic, societal and environmental impact an element of sustainability has also been selected. Hence The Creating Shared Value concept will be applied to provide strategic suggestions based on the strengths of Grundfos, the opportunities within the water & sanitation industry and the general business environment. The researcher believes that the CSV focus will provide more innovative solutions and will fit Grundfos’ company mission to “ensure water access for more people around the world” and “make a positive and lasting impact on the global climate challenges” (Grundfos, a).
The analysis will be conducted on three different levels being 1. The institutional settings (Institutional level)
2. The industry conditions (Industry level)
3. The Resources & capabilities of Grundfos (Company level)
… and ultimately based on the interaction between the three levels, recommendations for strategic choices will be made through a Creating Shared Value lens. A graphical illustration of the analytical framework can be seen below in figure 3.
Figure 3: Analytical Framework
This framework is inspired by the Strategy Tripod theory developed by Mike Peng (2009) which was mentioned under the literature review section. The three levels should be seen as three independent but interlinked levels that should all have a weigh in in Grundfos strategy. Meaning that the development on the institutional level affects the development in the industry and the other way around. Yet there will be more emphasis on the institutional part of the analysis as this is particularly important in the Strategy Tripod theory. Hence the analysis of the institutional setting will be more extensive than the remaining two. The first leg of the analysis will be the institutional settings, then the industry conditions and ultimately the resources and capabilities of Grundfos. The findings in the three analysis’ will be taken into consideration when recommending a strategy for Grundfos from a CSV perspective.
“How can Grundfos increase their impact in Mexico and thus
help solve the Mexican water crisis?”
Institutional settings Resources and capabilities
of Grundfos Industry conditions
Strategic choices made through a CSV lens
Answer to research question
1.5. Philosophy of Science and Methodology
This section will present the methodological approach and the methods applied in the development of this thesis. The section will explain the considerations made in terms of philosophical science, the research approach and the thought behind the collection of data. The Research Onion by Saunders (2009) has been selected as a methodological framework. The framework should be pictured as an onion with five layers. The idea behind the framework is that the core of the onion is the data collection methodology which is reached by working through the outer layers such as the research philosophy, the research approach, the research strategy, the research choice and the time horizons. The method has been chosen as its design has several stages in which the data collection methods can be understood. Yet the researcher recognizes that the research onion due to its simplicity does not necessarily only fit one philosophical field (Saunders, 2009).
Figure 4: The Research Onion (Saunders, 2009).
1.5.1. Research Philosophy
In this section the philosophical considerations done in the development of this thesis will be presented. This includes an assessment of whether it can be expected to reach a complete understanding of the true reality. Furthermore an assessment of whether the researcher and the problem area can be kept separate. By this is meant to which extent a conclusion to the problem area which is true and independent of the opinions of the researcher can be made. The theoretical choice of methods in this thesis are based on the neo-positivistic paradigm but with elements more similar to the positivistic paradigm. The distinction between the application of the two different paradigms can best be reasoned by the differences in the chosen theories.
The models based on the resource based view, the industry based view and the institution based view and the description of these are in this thesis influenced by the positivistic approach in which its ontological and epistemological approach traditionally has been realistic and objective. The researcher has the perception that it is possible to assess the real business environment, industry conditions and resources & capabilities of Grundfos. Yet it is more difficult to defend the positivistic paradigm in the discussion of the impact made by Grundfos through a Creating Shared Value perspective as the social and environmental impact is difficult to quantify. This is why the neo- positivistic paradigm is the primary paradigm of the thesis.
The epistemology and ontology are modified objectivism and critical realism in the neo-positivistic paradigm which distances from the positivistic paradigm in the way it recognizes and perceives the reality. Neo-positivism is defined by the same opinion as positivism which is that the reality exists independent of the individuals’ recognition and perception of this. Yet it is uncertain whether individuals are capable of achieving specific knowledge of the reality as individuals can be influenced by their surroundings and emotions which implicates their surroundings (Voxted, 2011).
The problem area of the thesis is to investigate how Grundfos can increase its economic, social and environmental impact. In the thesis there is no expectation that the true value of Grundfos impact can be determined just an expectation to come as close as possible. This is to assess how a CSV oriented strategy could have a social, environmental and macroeconomic effect in an emerging market.
1.5.2. Research approach
Within Saunders’ “Research Onion” there are two different approaches to the research, the deductive and the inductive approach. The deductive approach is based in general theories to draw conclusions concerning specific cases. Contrary we are talking about the inductive approach when a theory is developed based on the data. This thesis will be developed following a deductive approach as several hypothesis based on theories will be made and tested following a research strategy. The thesis will ultimately draw a conclusion to the problem area and the expectations to the strategy of Grundfos and the selected hypothesis’.
1.5.3. Research Strategy
The research strategy is the process which describes the research design of the thesis. It should be assessed which strategy the research should follow given the chosen problem area. Saunders offers several suggestions for strategies which a project can follow. As this thesis deals with the neo- positivistic paradigm the strategy will be characterized as experimental and manipulative. By applying the following strategy the general business environment, the given industry and the history of Grundfos be the base of the finished product which can then be reconciled with the expectations for the ultimate conclusion.
1.5.4. Research Choices
The fourth stage of the research onion is also a part of the research design. The theory states that there are three choices to be made in a research design in terms of the data collection. These are the “The Mixed Method”, “The Multi-Method” and “The Mono-Method” (Saunders, 2009). A distinction is made between qualitative and quantitative data as the three different models describe how to make use of the data. This thesis will apply “The Mono Method” as qualitative information will be the dominant component of this thesis and thus the paper will not rely on any quantitative methodology.
1.5.5. Time Horizon
The time horizon is set to determine whether the investigation is concerned with a particular phenomenon within in a specific time frame or if the time horizon is longer and aims is to examine change over time (Saunders, 2009). In this research project the time frame is specified and the deadline of the project provides a limited time frame. Thus a “Cross-sectional” time horizon is used in this investigation.
1.6. Data Collection
The sixth stage of the research onion is the innermost layer which is concerned with the data collection made in order to answer the problem area and its hypothesis’. As before mentioned this will be done using a deductive data-collection method. The data will be divided in primary and secondary data. In order to determine the validity and reliability of the data a separate section will
follow the methodology section as according to Saunders (2009) this is an important part of the research design.
1.6.1. Primary Data
The thesis consists of qualitative data of primary and secondary type. The primary data has been collected through skype interviews with some of the main stakeholders. In total four interviews were conducted seeking to uncover different aspects of the Mexican business environment, the Water & Sanitation industry and Grundfos. All four interviews were conducted according to the frames set by the interview guide by Kvale & Brinkmann (2009) and can be described as semi- structured interviews. According to the interview guide an interview should be a conversation of common interest between the interviewer and the interviewee (Kvale & Brinkmann, 2009).
Following this the researcher aimed at creating a relaxed atmosphere while applying the various techniques to gather data as detailed as possible. Preceding the interviews every interviewee was presented with the topic of the thesis, why they were selected as participants and how their answers could contribute to answering the research question of the thesis. All interview transcriptions can be found in the ‘Appendix’ section.
The first interview was conducted with Søren Blatt Bendtsen who works at the Danish Embassy in Mexico in the department of trade. The interview was conducted with the aim of gathering information of the general business environment in Mexico and the infrastructural challenges and opportunities in the country.
Secondly Emil Stub who works as a Global Market advisor at Dansk Industri was interviewed about the organizations efforts to promote Danish Export in Mexico. More specifically the purpose of the interview was to gain a further understanding of which Mexican stakeholders the organization works with and how they collaborate. Furthermore a meeting facilitated by Dansk Industri and various Danish and Mexican stakeholders in the Water & Sanitation industry was explained by the interviewee.
The third interview was made with Lars Smed Jensen who works as a Chief-Underwriter at EKF with the purpose of gathering data on how EKF works to promote Danish exports and how they asses the
institutional environment in Mexico. The interviewee was particularly relevant to interview as the organization deals with institutional risks when they facilitate investments between Danish and Mexican companies.
Additionally an interview was conducted with Luis Alvarez, Senior Sales Manager in Central America
& the Caribbean at Grundfos. The interviewee provided valuable insight on the Mexican institutional environment, the water and sanitation industry and on the strengths and weaknesses of Grundfos.
It was attempted to get an interview with a Mexican state representative but due to COVID-19 the process was stalled and ultimately cancelled.
1.6.2. Secondary data
The secondary data was equally important to the primary data as the two supplemented each other.
There is the risk that some of the primary data could be biased which is why it together with the secondary data provides a more accurate picture for the analysis. Especially in the first part of the analysis dealing with the institutional settings in Mexico the data needed was very factual and thus couldn’t be found in the empirical findings. The data was retrieved through an array of databases, books, websites and articles. Mentionable secondary data sources are; The Economist, The OECD, The World Bank, The PWC Consulting Group and Transparency International.
1.6.3. Validity and reliability
Apart from the layers of the Research Onion described above Saunders also described how the validity and reliability has to be included. The validity refers to “whether the findings are really about what they appear to be about” (Saunders, 2009) while the reliability defines whether the measurements and data collection methods are appropriate (Saunders, 2009). In the development of this thesis the researcher has aimed at collecting data as valid as possible. As before mentioned this paper relies on qualitative data gathered from primary and secondary data sources.
The researcher recognizes that the interview with Grundfos could be subject to the interviewee favoring Grundfos and their business practices. Furthermore do to his Mexican nationality he might be biased in his assessment of the institutional environment. Contrary the three other stakeholders
of Danish nationality might be more objective when talking about Mexico in an institutional context.
Hence the interviewer sought to prepare different questions that provided detailed answers but with a significant credibility in order to answer the research question. Likewise the researcher acknowledges that the topic of research is dynamic. Meaning that for instance the general business environment is changing a lot due to external events such as the COVID-19 pandemic and the change in power in Mexico. Therefore the conclusions might differ from a possible future analysis of the development of the water and sanitation infrastructure.
In terms of the validity the aim has been to understand the general business environment of Mexico along with the water and sanitation industry of Mexico in order to identify the challenges and opportunities for Grundfos to solve aligned with its company mission. The researcher deem the qualitative data valid as the data consists of peer reviewed reports, renowned international organizations and official governmental entities. The connection between the empirical data and the theory selected could be questioned because another response to the research question might have aroused if selecting a different set of theories. Yet the researcher believe the theories selected are fitting to the subject investigated and the dimensions of the analysis.
2. Analysis part 1: The Institutional Settings
2.1. An introduction of Mexico
The demographics of the 126 million people living in Mexico is categorized by approximately 79%
living in urban areas and 21% in rural areas. The greater area of Mexico City is home to one fifth of the country’s population. The age structure of the population is 27.8% being between 0-14 years old, 65.5% being between 15-64 years old and 6.7% is 65 and over. The agricultural sector employs 12.4 % of the working population, while the service sector employs 61.4 % and the industry employs 26.2 %. The Mexican people is divided into different ethnic groups and thus the population consists of an ethnically diverse group of people. The three biggest groups are the Mexicans of European descent (47 %), the indigenous people (21,5 %), and the Mestizos (30 %). The majority of Mexicans
are white while the other half is either indigenous or a mix between indigenous and European descent (Mestizo).
Mexico is one of the biggest economies in Latin America and among the 15 largest economies in the world. Their strategic geographical position close to South America and bordering the United States makes it an important production hub for many international corporations, especially in manufacturing such as the automobile industry and the aerospace industry. This is very much aided by the USMCA trade agreement. Mexico is very open to FDI and has several bilateral trade agreements with foreign countries including the United States and the European Union. The country has a diversified economy with the most important sectors being manufacturing, agriculture, mineral production, hi-tech industries, tourism and petroleum. Mexico is rich in natural resources best exemplified by the vast oil reserves administrated by the national oil company PEMEX.
2.2. Politics
2.2.1. Social groups
The term Mestizo which characterizes a person of mixed European and indigenous descent is rather fluid and means Mexicans who does not identify entirely with the Spanish traditions nor the indigenous culture. Therefore most Mexicans define their cultural identity as Mestizo regardless of the pigmentation of their skin. The indigenous identity is something labeled by the dominant White and Mestizo population as a negative term of describing the people lacking assimilation to the modern Mexico. The indigenous population is divided into several groups with the biggest being the Mayas, the Zapotecs, the Nahuas and the Mixtecs. Many of the indigenous people live in rural societies very distinct from the majority of the population living in urban areas. They have been granted autonomy to an extent by the Mexican government to protect their cultural heritage and their language.
In spite of their autonomy being constitutionally recognized the indigenous population is subject to racial discrimination which is being documented by various organizations. In the OECD’s 2019 economic survey it is presented that over three quarters of the indigenous population live in poverty
and the extreme poverty rate is six times higher among indigenous people (OECD, 2019).
Furthermore the indigenous people have a lower educational outcome exemplified by 43% not having completed primary school and 55.2% working in low-skilled manual jobs(IWGIA, 2020).
Studies made on the subject of income distribution dividing the level of income into 5 quartiles found a clear correlation between the Mexicans ethnicity and their income level. For instance 14.2%
of the white Mexicans are in the lowest earning quartile versus 31.4% of the Mestizos and 41.7% of the indigenous people. While in the highest earning quartile 24.4% are white, 9.5% are Mestizos and only 6.2% are indigenous (OXFAM, 2019). This is particularly relevant when analyzing the different social groups in Mexico as one of the main criteria of the PIE model is the distribution of wealth in the economic system. The model finds that there is a link between ownership of economic resources and political power (Mygind, 2007). As the social groups controlling most of the resources are often able to convert their economic power into political influence these groups will often dominate the political institutions and thus the political processes.
In order to track the dynamics between the social groups and the development in the economic system the researcher points to the fact that the southern states of Oaxaca, Veracruz, Chiapas and Guerrero which houses the most indigenous people are also the four states with most people living in poverty (OECD, 2019). The productivity differences are also remarkable as the GDP per capita is 5 times lower in Chiapas than in Mexico City (OECD, 2019). This reflects some of the differences in industrial structures where the north benefit from trade with the United States and an increased level of FDI while the southern states are less developed and more reliant on traditional activities such as agriculture. The much lower level of productivity in the south portrays the dynamics in strength between the different social groups as their relation to the economic development is highly unequal.
As explained in the section above there is a large concentration of material and human resources in the dominant white part of the society, something which should be underlined when explaining the asymmetries of power in Mexico. As sociologist Sewell explained “Schemas not empowered or regenerated by resources would eventually be abandoned and forgotten, just as resources without cultural schemas to direct their use would eventually dissipate and decay” (Scott, 1995). In cognitive
science a schema is a mental structure of preconceived ideas which can be used to describe the pattern of behavior which influence the attention and captivation of information. The quote represents the polarity of the social structure as Sewell stresses the interdependence of material features such as resources and the schemas. The researcher argues that both resources and the cultural schemas should be considered when seeking to interpret the dynamics of the social groups and their influence on the political processes. Hence the informal constraints such as “socially sanctioned norms of behavior and internally enforced standards of conduct” (North, 1990) here plays a role as they are empowering the resources and vice versa.
The dominance of the social groups in the political landscape and the diminished influence of the indigenous people can be illustrated by the infrastructure megaproject ‘The Mayan Train’ which will go from the Yucatan Peninsula to the south of Chiapas crossing through many indigenous territories.
The president AMLO announced his plan without consulting the many indigenous groups affected by the project. Representatives from the UN indicated that the project is “jeopardizing both the survival of Indigenous Peoples as collective entities and that of their territory” (IWGIA, 2020). The reactions from the indigenous communities has been various filings of constitutional relief actions in the federal courts while the socialist EZLN movement and its members stated that they were willing to die before allowing the project to go ahead (IWGIA, 2020). This could potentially obstruct the construction of the project or cause massive transaction costs.
The same was experienced by the Danish wind turbine company Vestas and EKF in their construction of the Eólica del Sur energy project in Oaxaca. As interviewee Lars Smed Jensen, Chief Underwriter at EKF explained the resistance towards the project from the local community increased the transaction costs as the stakeholders were taken to trial (Lars Smed Jensen, Appendix 3). The conflict similarly to the ‘Mayan Train project’ stems from the fact that the local community has not been consulted before the project was approved by the Mexican government. This exemplifies one of the risks when investing in an emerging market.
EZLN stands for the Zapatista Army of National Liberation and is a socialist political movement with roots in the indigenous community of Chiapas and it is an intense opponent to the Mexican
government. The group has its name from the revolutionary commander Emiliano Zapata who fought against the Mexican government in 1910-1920. The group went public and declared war against the Mexican government on the 1st of January 1994 as a response of the NAFTA agreement coming into effect. The EZLN was against NAFTA because they believed it would increase the inequality in the Mexican society specifically the inequality in Chiapas. Demanding work, better healthcare, better education and independence the group engaged in a military offensive against the government but quickly came to the conclusion that it would be a battle they could not win.
Instead they switched to a tactic of civil resistance which has been their focus to this day. The Zapatista communities of Chiapas has a certain degree of autonomy which can be shown through the hundreds of schools run by the Zapatistas independently of the Mexican government.
Furthermore the communities have their own healthcare service which is provided free of charge to its residents. The group remains to this day the strongest symbol of the indigenous opposition to the white/mestizo run Mexican government.
The Zapatista movement is important to mention when seeking to grasp the social groups in Mexico as they are highly influential in the south of Mexico. Their dominant presence in the south of Mexico is influencing the opinions of many indigenous people and thus affecting the political processes in the south. Political reforms created by the Mexican government could potentially be less effective in the south due to the resentment towards the government from the EZLN. As OECD recognizes the need for improvements of the institutional quality the researcher asks the question if this can be accomplished within a region where there is a lack of consensus with the overall direction of the country. The movement does of course not have complete autonomy in the south and the formal institutions such as the justice and legal system are still present. Yet the social groups influence on the enforcement of the political reforms should not be undermined. The EZLN may not have a voice in the Mexican parliament but they are as a cognitive cultural institution a dominant force in certain regions.
As stated by Scott (1995) the regulative, normative and cultural-cognitive elements exhibit stabilizing properties which guides the behavior of the people. Yet the institutions are also relatively resistant to change which in this case is exemplified by the norms and cultural beliefs of the EZLN
being passed on through generations. The researcher argues that this resistance of change in the cultural institutions is a factor which contributes to maintaining the economic gap between the social groups and therefore diminishes the indigenous people’s influence in the political processes and in the economic development. Therefore the differential performance between the south and the north could be seen as heavily influenced by the way the institutions have evolved over time.
As stated by North “Institutional change shapes the way societies evolve through time and hence Is the key to understanding historical change” (1990).
2.2.2. Political processes
The political landscape of Mexico is dominated by four political parties. The Institutional Revolutionary Party (PRI), Democratic Revolution Party (PRD), National Action Party (PAN) and National Regeneration Movement (MORENA). Historically the PRI has been the most dominant political party as they ruled interrupted for 71 years until the year 2000. Given that the party has existed for nine decades and been in power for seven they have had a wide range of ideologies. The company would historically be characterized as conservative and their policies as center-right.
Becoming closer to the catholic church, privatizing state owned companies and promoting free- market capitalism are some of the reforms which has shaped them as a political party.
The term partocracy, which can be defined as the political party having the primary basis of rule and not the individual politicians or the citizens, is very suiting when describing the rule of PRI. This is due to the non-competitive history of PRI and the inseparable connection between them and the Mexican state through most of the 20th century. The small elite of the party ruled the formal institutions of enforcement such as the police and the justice system which was permeated by corruption causing the rule of law to deteriorate. The party is linked to the white and mestizo elite of the population as this social group has dominated the positions in power. This is not an uncommon situation in Latin America as conservative parties which represents the social groups with capital ownership often dominates politics. The groups convert their economic power position into political influence as there is a close link between the two according to the PIE model (Mygind, 2007).
The PRI regained power in 2012 with Enrique Peña Nieto as president as voters were hoping that the return of the party could bring more stability to the spike in organized crime which caused 60,000 deaths in 2011 and fuel an economy which had seen an average annual growth rate of 1,8
% from 2000 to 2011 (Economist, 2012). Yet the 6 years in charge for the PRI did not result in any memorable changes and in 2016 a poll showed that 83 % of the Mexican voters perceived the PRI as the most corrupt party in Mexico (Milenio, 2016). This was exemplified by what has been called the most corrupt election in modern Mexican history were president Nieto’s cousin was elected as governor in the state of Mexico despite an overwhelming body of evidence saying the election was rigged (Proceso, 2017).
As a consequence of the continuous corruption in Mexico and the high level of impunity exempting the corrupt top officials from punishment the Mexican voters in 2018 elected president Andrés Manuel Lopez Obradór, often referred to as AMLO. The election was won by a landslide and it was the first time since the Mexican revolution in 1910 that a candidate not from PRI won a majority in the Chamber of Deputies and in the senate (Reuters, 2018). The massive victory for AMLO is historically interesting because the voters guaranteeing the win can be classified by their lack of ownership of economic resources. This shift in social groups with political influence breaks with the traditional schemes in Latin America where the elite often has the most political influence and therefore dominate the formal institutions. Yet in Mexico given the large inequality, the majority of the population are low skilled workers such as farmers, workers in manufacturing and services or small independent entrepreneurs.
This overrepresented social group have no capital ownership but instead managed to gain political strength through numbers. This can according to the PIE model lead to a strong position at elections
“if there are democratic political institutions and if the workers are well organized” (Mygind, 2007).
The researcher perceives the victory as the working class Mexican’s showdown with the elite, led by AMLO who in many ways distinguishes from the typical Mexican top official. An example could be that the president spent 6 years of his life living in a shack and sleeping in a hammock when he worked as a representative in Mexico’s National Indigenous Institute (The Guardian, 2018).
In The National Development Plan, which is the document that determine the public policy priorities, the government aims to “Transform the country’s public life to achieve greater well-being for everyone” (OECD, 2019). The three main pillars of the plan is improving justice and the rule of law, increasing welfare and thus reducing inequality and policies aimed at increasing productivity and promoting economic growth. Especially the vowel to improve the rule of law is what has caused AMLO to be such a popular figure among the Mexican lower- and middle class voters. According to the OECD the improvement of institutional quality would have the largest impact on economic growth. Furthermore they state that improving the enforcement institutions would bring increased opportunities to the poor and underprivileged as they bear many of the consequences of corruption (OECD, 2019). The weak enforcement institutions influence the economic development as they increase the transaction costs and the level of uncertainty when doing business in Mexico.
In spite of Mexico having crawled up eight places in the ‘Transparency International’s Corruption Perceptions Index’ (Reuters, 2020) institutional change is still a complicated process. The formal rules can be changed overnight yet the cultural constraints which are often embedded in the government officials’ inclined to corruption are difficult to change. The informal constraints are important when seeking to understand the historical change as they are the reason why institutions change incrementally as they are so rooted in societies (North, 1990). To illustrate just how complicated a process institutional change is the researcher points towards the historic legislation that strips public servants of prosecutorial immunity which was recently passed in Mexico (Reuters, 2020). This in theory means that no one will have impunity and even the president can be prosecuted, yet recent corruption allegations of president AMLO raises the doubt if some officials are still above the law. There are several allegations towards the president’s brother and his sister in law who both possess important public positions. Despite AMLO vowing to investigate any complaints or allegations of corruption he has failed to do so as no formal proceedings have been taken. It questions whether the new government is actually determined to fight corruption or if the informal constraints such as customs, code of conduct and traditions in this case prevent the president from enforcing his political decisions.
